Reviewing Your Homeowners Insurance Policy
If you have completed one or more significant home improvement projects, chances are that you have increased the replacement cost of your home. The market value of your home may not have appreciated, but certainly the cost of building an exact duplicate of your home has increased. You probably want to review your homeowners insurance policy to make sure that your coverage amount is sufficient given you home's current replacement cost.
According to a study by Marshall & Swift/Boeckh, two out of three homes in the Unites States are underinsured. Here's why:
According to a study by Marshall & Swift/Boeckh, two out of three homes in the Unites States are underinsured. Here's why:
Construction costs are rising at about 3% per year. Even if you made no improvements (but still maintained the home), a home that cost $250,000 to replace in 2003 would cost about $290,000 to replace in 2008. Additionally, home improvements and renovations drive up the replacement cost of your home. It is estimated that 75% of homeowners do not update their homeowners insurance policy following a home improvement or renovation. Some improvements that may significantly increase your home's replacement cost include decks and patios, kitchen or bathroom remodeling, finishing a basement, and building an addition.
Finally, today's typical insurance plan covers less than it did in the past. Yesterday's policies would guarantee replacement cost coverage. Today, coverage is usually capped at 120-125% of the insured value of your home.
Here are a couple of additional resources:
Wikipedia entry for home insurance- covers the common types of homeowners insurance policies
MSN Money article: Why 2 out of 3 homes are underinsured
The MSN Money article suggests taking the following steps to tell if you have enough coverage:
- Read your policy
- Insure the house, not the land or the mortgage
- Use averages as a starting point- you can start with an average of $75-$85 per square foot and make adjustments from there.
- Talk to builders in your area to get a good estimate based on local market conditions. As an alternative, you can hire an appraiser.
- Consider adding upgrade coverage
Jon
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